Money laundering is the process of making illegally-gained proceeds (i.e. “dirty money”) appear legal (i.e. “clean”).

Money laundering involves three steps: placement, layering, and integration. Placement is the introduction of illegitimate funds into the legitimate financial system. Layering involves moving the funds around to create confusion regarding where the money originated. The objective is to obfuscate the financial trail to ensure efforts to trace its origins are hindered. Integration is the last stage of the money laundering process and occurs when the funds re-enter the mainstream economy in a legitimate looking form. The objective is to reunite the money with the criminal(s) and have it appear legal. In this way, it is integrated into the financial system where the “dirty money” appears “clean.”

Money laundering risk is the exposure to legal penalties, financial forfeiture, and material loss an organization faces if it is found complicit in money laundering.

Commercial cannabis businesses may be exposed to a higher money laundering risk depending on their treasury services; third parties, customers, and employees; and geographic locations. Some commercial cannabis businesses may obfuscate financial transactions, deal with a riskier population, or transact in or through higher-risk geographic areas.

Treasury Services

Treasury services include how money is raised, received, stored, distributed, and transported. Certain treasury services may drive money laundering risk depending on the nature of the specific product or service used, speed at which funds are processed, reduction of record keeping, or facilitation of anonymity.

Third Parties, Customers, and Employees

Certain third parties, customers, and employees are more vulnerable to money laundering risk. Money laundering risks increase when financial transactions obfuscate the source of funds or involve organizational structures that offer anonymity to the beneficial owners or controllers. Third parties, customers, and employees may not always know they are participating in a money laundering scheme but may be doing so out of negligence or absence of knowledge. Commercial cannabis businesses should exercise judgment and neither define nor treat all members of a specific category as posing the same level of risk.

Geographic Locations

Identifying geographic locations that may drive a higher money laundering risk is essential. Commercial cannabis businesses should evaluate the cross-border business transactions that do not serve an economic purpose and the appropriateness of locating vulnerable treasury services or operations in geographic locations known to be susceptible to money laundering.